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Industry Outlook

After a disappointing spring season sales due to colder-than-normal weather in April and May, retailers are now busy with another significant spending event in the U.S. – the Back-to-School and Back-to-College shopping season. This is a crucial time for retailers as American households stock up on school and college supplies.

According to a research conducted by National Retail Federation (NRF), total Back-to-School and Back-to-College spending for 2016 is expected to reach $75.8 billion, up from last year’s $68 billion. This selling season represents nearly 17% of the full-year retail sales in the U.S.

As online shopping has become more prevalent, this time people are on the lookout for the best online deals to prepare for their school and college year. Last year, digital shopping attracted more than $56 million spending, while this year the figure is expected to cross $65 million.

The key categories of sales during this season are apparel & accessories, books & music, computers & consumer electronics, office equipment & supplies, toys & hobbies and sporting goods, to name a few. Some close contenders for the Back-to-School and Back-to-College market are Wal-Mart Stores Inc. (WMT - Analyst Report) , Best Buy Inc. BBY, Inc. AMZN, Office Depot Inc. ODP, Staples Inc. (SPLS - Analyst Report) , J.C. Penney Company Inc. JCP.

Additionally, NRF projects retail sales in 2016 to rise 3.1%, which is higher than the 10-year average sales growth of 2.7%. Online sales in 2016 are expected to increase in the band of 6–9%.

Long-Term Trends that Rule the Sector

As revealed by Marian Salzman, CEO of Havas PR North America on the final day of Retail’s BIG Show 2016, there are two trends that are here to stay. The first is the growing uneasiness in everyone’s lives and the second is an addiction to the tech world. With these trends ruling the minds of people, it is essential that retailers innovate new ways to make life easier for consumers and complement their digitized ways.

With the increasing influence of technology on the buying patterns of consumers, the general retail sector trends set to rule the future are jotted below:

Omni-channel Eliminates Retail Pure-Plays: Omni-channel, which emerged as an option to offer more touch points and multiple channels to customers, has gone beyond this simple definition. The cross-channel sales mantra now requires every retailer, whether online or brick and mortar, to bring together both physical and digital systems to serve omni-customers. As a result, retail pure-plays, both online and offline, are now turning omni-channel. This means online retailers are coming up with physical stores or pop-up shops to satisfy customers and vice versa.

Here, the prime objective is to bridge the gap between a physical and an ecommerce store of any particular retailer. For example, Macy’s Inc. M makes the most of its omni-channel presence with services like click-and-collect. Additionally, the company’s site allows customers to access the inventory at its local stores, so that they can check the availability of a product at the nearest store, purchase it and have it picked up or arrange for same-day delivery. In another online feature, Macy’s mobile app allows customers to scan bar codes of products at stores and check online reviews, promotions and the like.

Growth of Off-Price Retailing: A recent trend shows that apart from e-commerce, the rise of off-price retailing is making competition worse for retailers. Off-price retailers like TJX Companies Inc. (TJX - Analyst Report) , Ross Stores Inc. (ROST - Analyst Report) , Nordstrom Inc. JWN Nordstrom Rack, Five Below Inc. FIVE, Macy’s Backstage, Bloomingdale’s, Kohl’s Corp. KSS and others are doing a good job, unlike department stores and specialty clothing retailers.

Customers today are looking for value, which means reasonable and quality merchandise. Off-price retailers offer immense value as they purchase their inventory at discounts. In contrast, department and specialty retailers have to resort to mark downs from time to time in order to clear their inventory. This has driven a major shift in consumer preferences to off-priced merchandise, making department and specialty store irrelevant in consumer minds.

Expanded Payments Options: With retail undergoing a sea change, the modes of payment while shopping have also evolved dramatically. The increasing use of mobile payments and the EMV mandate in the U.S. induced retailers to remodel their payment terminals to accept multiple options like mobile payments and EMV cards.

Some of the available payment solutions are PayPal’s PayPal Here Chip Card reader, Mercury and Poynt, which equip retailers with different payment accepting options. These devices or hardware ensure compatibility with iOS and Android devices, magnetic cards, EMV, QR codes and NFC payments such as Apple Pay, Android Pay and Samsung Pay.

Car rental company, Avis Budget Group Inc. CAR recently introduced a new payment option with MasterPass by Master Card, wherein travelers can make advance payments for their rentals while making reservations on and

Technology-Friendly Brick & Mortar Stores: With shoppers increasingly becoming tech savvy, brick and mortar stores need to leave their old-fashioned layout behind and improvise by adopting innovative in-store technologies. With rising demand for convenient delivery and alternative payment solutions, all at affordable prices, technology is bound to play a key role in growth. This is because consumers are becoming increasingly dependent on their mobile phones and other digital devices to buy goods.

The simplest way to execute this is through in-store mobile devices, through which customers can make payments, see product demonstrations, gather information and connect to social networks. Further, retailers are exploring new ways to use mobile devices in store. As a result, they intend to develop mobile apps that will track customers as they shop and send them tailored offers on products in sections they are in; recommend items based on past purchases; or allow them to program automated shopping lists.

In-store technologies, that customers look for these days include mobile point of sales, price checkers, self-checkout payment lanes, information kiosks, and digital signage among others. Other innovative technologies to engage customers both in store and elsewhere are smart shelves, Wi-Fi hot spots, point-of-sales (POS) systems, virtual storefronts and endless aisles.

Reinvention of Loyalty Programs: With perpetual changes in industry trends, the importance of rewards and promotions for customers has been taken over by value, track record and convenience.  Hence, the traditional loyalty programs have to be clubbed with customized rewards, great products and buying convenience in order to be successful.

Further, adding the tech aspect to these programs will enhance their value. Hence, the traditional loyalty scheme needs to be replaced with customer-friendly and easily redeemable rewards.

Of the many retailers that have a deep focus on enhancing rewards on their loyalty schemes, Nordstrom, Rite Aid Corp. (RAD - Analyst Report) and Office Depot are a few.

Another method that retailers are now adopting to draw consumers involves going beyond purchases to reward them for their transactions and engagement. For instance, Walgreens Boots Alliance Inc. (WBA - Analyst Report) allows its customers to earn points for every health-related activity they engage in, including walking, weight tracking, and so on. Also, DICK’S Sporting Goods Inc. DKS recently introduced the “Move” feature to its mobile app, which allows customers to connect to fitness tracking applications like MapMyRun and Fitbit to earn DICK'S ScoreCard points for attaining their activity goals.

Impact of Social Media on Shopping Decisions: Business firms have taken to the widely used social networking sites for their promotional purposes. Over the past several years, retailers have been using social media platforms to advertise their brands, launch products and campaigns, talk to customers and even make merchandising decisions.

The companies are now also selling their products through social networking sites like Facebook, Instagram and Twitter, which recently added shopping functionalities. Some of the retailers that have already adopted this platform are Nordstrom and Target Corp. (TGT - Analyst Report) , which are using the Like2Buy platform on Instagram, and The Home Depot Inc. HD.

Merging Online and Offline Data to Track Shoppers: The growing use of multiple shopping channels has made it imperative for retailers to collectively study their online and offline data in order to analyze the buying habits of consumers. This gives a more comprehensive picture of their shopping practice.

A study of online and offline data has revealed that shoppers usually browse for products online before finally making purchases in stores. Such data can be helpful in tracking the purchase habits of customers and executing effectively on their omni-channel initiatives.

Taking Charge of Value Chain: The success mantra in modern retail is to provide a compelling shopping experience, which is only possible by taking full control of one’s value chain i.e., from the creation of products to their consumption. Some of the retailers that have proven themselves in this area are Apple, Ralph Lauren Corp. (RL - Analyst Report) and Trade Joe’s. We expect this strategy to gain importance, with retailers focusing more on fulfillment practices, product distribution, speed and convenience of delivering products to consumers, and more.

Growth of Retail in Emerging Markets: Having tapped most of the potential in the domestic market, retailers have started venturing into emerging markets. Most retail chains are witnessing growing demand for their products in countries like Brazil, the Middle East, China and India. Retailers planning to venture into these markets include the likes of The Gap Inc., The Clorox Company CLX, Ralph Lauren, V.F. Corp. (VFC - Analyst Report) and Tiffany & Co. (TIF - Analyst Report) .

Consolidation in Retail Industry: The U.S. retail industry has been witnessing further consolidation, with companies merging with peers to become larger and vying to lead the markets they serve. Some of the recent mergers the industry has seen include that of Dollar Tree Inc. DLTR with Family Dollar, which has given rise to mega the U.S. discount retailer. Also, apparel retailer, Ascena Retail Group Inc. ASNA bought the ANN Taylor parent ANN Inc., which will strengthen the position of the former in the women’s apparel market.

Additionally, a few merger announcements that are in progress include that of large grocery retailers Royal Ahold NV and Delhaize Group that will make the largest grocery store in the U.S. The largest and most-awaited drugstore merger between Walgreens and Rite Aid is also on track, which will create the No.1 drugstore chain in the U.S. Not only this, a key merger between Office Depot and Staples was called off recently on grounds of competition. Had the merger been approved, it would have created another large company with the majority market share in stationeries ad office supplies.

Localization of Products Mix and Store Formats to Win the Race: Localization requires tailoring of products and stores to satisfy the needs of native communities. This trait is expected to prove the most beneficial this year as customization is likely to attract more customers. One example of such a retailer that tailors its merchandise for respective stores is O’Reilly Automotive Inc. (ORLY - Analyst Report) .

Others following this trait are retailers like Starbucks Corp. (SBUX - Analyst Report) , Target and Chipotle Mexican Grill Inc. CMG. These retailers have deviated from their usual store formats and established smaller “express” stores to tap the potential of the urban markets.

Bottom Line

With the easing of wage stagnation, more new jobs and steady consumer confidence, the retail industry is definitely poised for growth in 2016. Despite headwinds from global economies and the recent Brexit vote the U.S. economy has shown resilience with a rise in gross domestic product (GDP).

As retail consumption makes for about two-third of the U.S. GDP, the performance of this vital sector plays a key role in the well-being of the economy.

As for the general trend, omni-channel will rule retail business. The focus of retailers will stick to this growing business model for an exemplary customer experience.

As you can see, there are plenty of reasons to be optimistic about the retail industry over the long term. But what about investing in the space right now?

Check out our latest Retail Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.

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